Into the Rabbit Hole

Strategy

How did business fare in 2010, and what’s coming up for foreign enterprises in China in 2011? Hear from players in three Chinese industries that should be of interest to New Zealand businesses: the food and beverage industry, the manufacturing industry and the ecommerce industry.

By Sophie Che (Shanghai Business Review)

THE FOOD & BEVERAGE INDUSTRY

Frank Rasche, Managing Partner, Element Fresh

What were the major trends in the food and beverage industry during 2010?

From our perspective, 2010 has been a very good year. In Shanghai and Beijing, the economic worries of 2009 seem to have eased, and the occupancy of Grade A office buildings around our restaurants has gone up. These are both are very positive factors for us. More and more international restaurants are opening, particularly in Beijing, where the number and variety of restaurants are growing fast. We also see that our key themes at Element Fresh – freshness, nutrition and local sourcing – are echoed by other ventures’. Interestingly, many mid- to high-level Chinese restaurants now carry salads on their menu, too – that’s a very recent development.

The Expo definitely had a positive impact in Shanghai. There was an influx of people, with Expo staff and visitors from all over China and beyond. Without a question this affected restaurants, particularly in Pudong. However, at Element Fresh, our focus is very much on the regular customers, so we were more excited about the people moving into the new office towers in Lujiazui, and the buzz when a feeling of optimism and excitement returned to the city.

What were the challenges for this industry in 2010?

Increasing costs across the board were a big challenge. Housing and the cost of living for our staff lead to increased salaries, and there were also big increases in indirect HR costs. Restaurant rents continue to climb as well, and of course the cost of ingredients is on the rise. It takes a lot of creative thinking to keep price increases moderate.

What is the outlook for the food and beverage industry and your company in 2011?

Without a doubt there will continue to be lots of new restaurants opening in the major cities, bringing food and ideas from all over the world. It will be good for diners to have new choices, and the competition will make all of us more focussed. As for Element Fresh, we are very optimistic about 2011, and have so far committed to four additional locations, including the new Kerry Parkside in Pudong. We will add at least two locations in Beijing, and open our ? rst Guangzhou restaurant in the amazing Taikoo Hui development.

What do you see as the opportunities or constraints for the food and beverage industry in Shanghai during the coming year? How does this compare with the other regions in China?

Shanghai will continue to be a great place for restaurants. Both locals and international residents are excited about food, new dining experiences, and appreciating quality and service. But as diners have a lot of choice, our focus on quality and service must be relentless. In cities beyond Shanghai and Beijing, the level of competition (at least for international restaurants) is much lower, and certain costs are still more reasonable. However, there are very different challenges in terms of building the right supplier network, training staff in new cooking and service styles, and building the customers’ appreciation of different cuisines.

The Manufacturing Industry

What were the major trends for the manufacturing industry during 2010?

An emphasis on innovation as the means to achieve sustainable development was very noticeable.

Today in China, there is a real understanding of the way innovation can drive social change – for example, the Shanghai Expo clearly connected innovation with sustainable development.

I think that technological advances relating to semiconductors continue to support all kinds of development in China, and elsewhere. Advances in the field of semiconductors have driven social change for many decades. However, the progression of specific products in this industry will depend on the needs of local customers and the particular market dynamics in 2011. At NXP, here we focus on developing product technologies, we have been working to meet demands for identification, automotives, automotive entertainment and networking, microcontrollers, base stations and lighting markets.

What were the challenges for this industry in 2010?

The challenge was to meet social needs with cost-effective new technology. That challenge is not so much an obstacle but rather a stimulus to focus strategy on the marketplace and customers.

We will achieve growth in the market only if we can continue to create better solutions, so that applications really address social needs. High Performance Mixed Signal technology, which provides an essential element to help solve problems associated energy efficiency, healthcare, mobility and security, will undoubtedly have an important role to play in our field. Meanwhile, with the appreciation of the renminbi, price pressure on raw materials and the cost of labour and manufacturing are the factors which will influence the financial performance of an international company in China. For NXP, products that efficiently balance the cost/performance equation to provide added functionality at affordable price points could help us react to this issue in the future.

What is your outlook for the manufacturing industry and your company in 2011?

Two factors will drive the semiconductor industry in the years ahead; society’s challenges, and technological innovation. In China, these are already top priorities on the government’s agenda. At NXP, we will follow our global strategy in China as elsewhere. However, we will also look at the customers’ particular needs in China, especially when it comes to automotives, identification (particularly in Near Field Communications Technology), wireless infrastructure, lighting and micro controllers. Most of those areas are a part of China’s stimulus plan, helping to support economic growth as we move on from the financial crisis and the long process of recovery.

What do you see as the opportunities or constraints for the manufacturing industry in Shanghai during the coming year How does this compare with the other regions in China?

I’d rather take the Chinese market as a whole than Shanghai in particular. China remains one of the world’s most important emerging markets, and it is growing fast. Many MNCs have indicated that China is one of their key strategic markets for investment and sustainable development. It goes without saying that NXP feels the same way.

The E-Commerce Industry

Jonathan Lu, CEO, Taobao

What were the major trends in the e-commerce industry during 2010?

The general market trend has been positive. B2C e-commerce has attracted much more attention than in previous years. There were many new websites launched in this sector, and we have seen more and more venture capital investment. There have also been some interesting new initiatives. One new online shopping model was group buy (or group purchase). In a group buy, the products or services are offered to a group of consumers, rather than to an individual consumer, often with special discounts or incentives. However, most of the new group buy concepts are copies of the US website, Groupon, which doesn’t match with Chinese customers’ habits and needs. Although we have seen about 400 to 1,000 group buy websites in 2010, it’s still a time of exploration, and some of them already closed.

The sector will continue to evolve – it’s survival of the fittest. With these developments, and increasing sales, the growth in trading volume for China’s e-commerce will be seen to have exceeded 100 per cent in 2010. Even so, there are still almost no major foreign players in China’s e-commerce industry.

What were the challenges for this industry in 2010?

The biggest challenge was to get “back to basics” – logistics, security and the customers themselves needed to keep up with swift developments online. We heard a lot of complaints regarding logistics. Obviously, this still needs to keep pace with the development of China’s e-commerce industry, and that’s not easy. Security is also an ongoing problem for e-commerce. We saw the number of security incidents rising, though the general rate is decreasing.

Then there were the consumers themselves – it takes time to educate the market. We will need to continue to encourage more people to try online shopping. We’ll also be trying to improve the online shopping experience, for example by finding a way to make online shoppers feel confident about online security measures.

What is the outlook for the e-commerce industry and your company in 2011?

With the increasing number of web users in China, the Chinese e-commerce industry will grow more quickly in 2011. The younger generation is becoming larger, and more people from the older generations are starting to accept online shopping, so the needs of customers will become more diverse. We will see more companies entering this market.

To achieve further growth in the coming year, B2C e-commerce should explore new models to cope with the fiercer competition in this industry, with greater product selections, the launch of third-party open platforms, etc.

Online shopping websites will be more organised in terms of the way products are arranged and presented to the consumers, and they are likely to be more specialised in terms of the range of products available. Customers will look for different options and levels of specialisation, to meet their different needs. To give an example, while Taobao offers C2C online shopping with a mixture of different products, Tmall, a B2C e-commerce site, sorts products into groups, such as electronics, shoes, sports, furniture, etc.

What do you see as the opportunities or constraints for the ecommerce industry in Shanghai during the coming year? How does this compare with the other regions in China?

The e-commerce business used to be based in the first tier cities, such as Beijing, Shanghai and Guangzhou, but the second and third tier cities have been developing fast in recent years.

Shanghai still takes the biggest market share in terms of trade, but there are actually fewer local e-commerce enterprises based in Shanghai than there are in Zhejiang and Guangdong.